Thursday was more of the same for beleaguered retail company L Brands Inc (NYSE:LB). The parent company of Victoria’s Secret and Bath & Body Works reported that comparable same-store sales fell 9% in June, versus expectations for a 6.8% decline. The results were dragged down by a 17% drop at Victoria’s Secret, which continues to be negatively impacted by the exit of swim and apparel. LB stock was down about 12% on the news and it has continued to fall.
It’s tempting to look at L Brands and say its a buy here. After all, this stock was near $100 just over a year ago. Now, its under $50.
But investors should resist that temptation. LB isn’t the same company it was when the stock was near $100.
In fact, its far different, and this new LB stock still has more room to fall.
Too Many Headwinds for L Brands
One thing that should be abundantly clear is that this is not the same company that traded close to $100 a little over a year ago. When LB stock was close to $100 at the end of FY15, earnings-per-share were around $4 and growing in the mid-teens rate. Comparable same-store sales were up 5% and net sales were up 6%. The gross margin rate was up 80 basis points, the SG&A rate leveraged by 10 basis points and operating margins were up 90 basis points.
Things are far different today. EPS is expected to be around $3.25 this year, a 13% year-over-year decline. In the most recent quarter, comps fell 9% and net sales fell 7%. Gross margins fell about 300 basis points, the SG&A rate deleveraged by 100 basis points, and operating margins fell by roughly 400 basis points.
So what gives? Well, L Brands management is streamlining Victoria’s Secret’s product offering. That means Victoria’s Secret is going back to its roots, and will be almost entirely a lingerie shop now. No more swimwear. No more apparel. This exit from swim and apparel is weighing on topline results at Victoria’s Secret. Last year, Victoria’s Secret comprised more than 60% of total sales. Naturally, then, when Victoria’s Secret struggles, so does all of LB.
But there is more to LB stock’s decline than just the exit of swim and apparel from Victoria’s Secret. One of the bigger trends among young consumers is a push towards “all-natural”. This mostly deals with natural foods, but it also includes natural beauty. As natural beauty has trended in, push-up bras and aesthetic-oriented lingerie have trended out of favor. Instead, consumers are opting for more natural bralettes and comfort-first lingerie.
For all of these reasons, Victoria’s Secret has now posted six straight months of double-digit declines in comparable sales. Things won’t turnaround any time soon, and neither will LB stock.
LB Stock Is Still Too Richly Valued
Lets do some math here. L Brands has an ugly balance sheet full of debt and without much cash. The net debt position is roughly $4.2 billion. That equates to about $14.50 per diluted share. If we add that back into the LB stock price, we get to about $62 per share in enterprise value. EPS next year is expected to be $3.42. That means LB stock is trading at roughly 18.1-times FY19 EPS estimates, after backing out cash and adding back debt. But earnings growth next year is expected to be just 5.6%, and only 8% per year over the next 5 years.
From this standpoint, LB stock’s forward P/E multiple is at a 125% premium to its 5-year growth rate, and a 225% premium to its 1-year growth rate.
Why should a stock with as many macro and transition headwinds as L Brands be rewarded such a premium valuation?